N Chandrasekaran allays Tata Power shareholders concerns on debt, rules out rights issue

MUMBAI: Tata Power chairman N Chandrasekaran has reassured shareholders, once again this year, that the company is working on reducing its debt burden and finding solutions to the Mundra power plant, the millstone around its neck.

Allaying shareholders’ concerns at the company’s 100th annual general meeting (AGM) in Mumbai on Tuesday, Chandrasekaran said that, “We are working on a solution to the Mundra problem; it’s not that we are not trying hard to find a solution. We are in touch with all five states. Unfortunately, when there is an election, the whole process stops and now we hope that the (general) elections are over, and before the state elections start, we need to try and get a closure on this.”

Chandrasekaran spent the bulk of his answers at the AGM responding to questions on the 4000 MW coal-fired Coastal Gujarat Power Ltd (CGPL), in the seaside town of Mundra in Gujarat. A wholly-owned subsidiary of Tata Power, it has long-term power purchase agreements with Gujarat (1,805 MW), Maharashtra (760 MW), Punjab (475 MW), Haryana (380 MW) and Rajasthan (380 MW) for 25 years at a levelised tariff of ?2.26 per unit. However, with the agreements only allowing a partial pass through (45%) of fuel costs, the company has been exposed to price fluctuations of imported coal. During FY18, CGPL’s loss widened to ?1,721.31 crore from ?849.74 crore a year ago.

Tata Power is India’s largest private sector integrated power company with a generation capacity of 10,957MW. The total consolidated debt of the company stood at ?48,506.04 crore as at March 31, 2019, against ?48,589.32 crore in FY18. CARE Ratings, which rated CGPL’s issue of ?1,300 crore of non-convertible debentures, cited the existing debt as one of the risk factors. (CGPL raised ?1,110 crore last week to refinance high-cost debt.)

In 2017, Tata Power offered to sell 51% stake in the plant to the Gujarat state power distribution company for a notional Re 1, as a partial relief from debt stacking up. The state government rejected the proposal. The company’s requests for a compensatory tariff that would cover the increase in the price of imported coal was also disallowed. In October 2018, a high-powered committee recommended sharing the losses incurred in CGPL between consumers, lenders, and developers, through a combination of allowing a pass-through of fuel costs, a haircut taken by lenders on their loan exposure to the plant and Tata Power offering a share of profits from coal mining in Indonesia (where it imports coal from). In January 2019, the Supreme Court ruled that PPAs could be amended with distribution companies subject to Central Electricity Regulatory Commission’s (CERC) approval. These approvals are awaited.

Chandrasekaran laid out the problem to shareholders saying that Mundra alone accounts for about ?17,000 crore of Tata Power’s total debt. “Some of this is offset by profits from sale of coal, which comes to about ?1,300-1,500 crore a year, depending on the coal price. But the annual loss from Mundra is about ?1,650-1,700 crore. If we get relief, it will definitely reduce a part of the losses, but this depends on state governments.”

He also noted that a rights issue, that could repay part of the debt, is out of the question until the company can arrive at a workable solution to the Mundra problem. “Many say do a rights issue but the size of rights issue will not be enough to pay off debt. We should find a way to clear debt and then do the rights issue. Otherwise all the money from a rights issue cannot not go toward reducing debt,” he said.“We have to worry about return. The company’s return on capital is only at 8%; we have to increase that and unless we do that we can’t come to you to reduce debt.

“It’s not a simple question of going for a billion dollar rights issue, even if Tata Sons is willing to backstop it, there are things we need to address first. We’ve got to make returns. Any solution should improve returns and profit, reduce interest cost and deliver growth,” he added.

Meanwhile, Tata Power will work on reducing the number of subsidiaries, stay away from big acquisitions and divest non-core assets to focus exclusively on the power business.

The expected consideration from a 30% stake sale in Indonesian coal mine PT Arutmin is $246 million, although this deal has been pending since 2014. The company has sold off investments in Tata Communications, Pantone Finvest and Tata Teleservices Limited (TTSL) while Tata Projects and Strategic Engineering Division (SED) are in the process of being divested. Tata Power will not focus on “anything other than power,” Chandrasekaran said. “The company cannot lock in capital.”

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